Building wealth can seem like an impossible goal, especially if you are just getting started. In the early stages, both your income and investment returns may be small, and that makes it easy to get discouraged. However, it’s important to remember that building wealth takes time. Rarely do get-rich-quick schemes actually work. But the good news is that once you have a plan in place, you won’t have to think about it quite so much. In fact, your plan will likely be more successful if you don’t think about it as much because your emotions will be less likely to cloud your judgment.
If you’re looking for smart ways to build your wealth, a financial advisor could help you create a financial plan for your goals.
Wealth building focuses on making money, saving money and investing money. Here are five steps to help you build wealth:
Setting up a budget is one of the most important parts of building wealth. You might think a budget isn’t necessary if your finances are simple or you’re a high earner. However, one survey revealed that 48% of Americans earning over $100,000 live paycheck to paycheck. One reason for this could be lifestyle inflation, where people increase their spending as their income increases.
Setting up a budget can help you keep lifestyle inflation under control. There are several different types of budgets, but the reason for doing this step first is to know where you stand. Once you find the problem areas (if any), you can start addressing them in the next step.
Reducing expenses may be necessary depending on what you find when setting up your budget. Take a look at your budget and see if there are areas that need attention. Many popular budgeting apps will sync with your financial accounts and recommend how much you should be spending based on your income. Hence, they make it easy to see which areas need attention. Reducing your expenses can leave you with more money at the end of the month which you can put toward building wealth.
If you don’t have enough room to cut expenses, the other way to build wealth is by increasing your income. At a certain point, this is necessary for almost anyone who wants to build wealth because there is only so much that you can reduce your expenses. Eventually, you will have to earn more if you want to build wealth more quickly.
The common ways to increase your income include:
These items are roughly in the order of how much of a time commitment they are. In the case of moving to a new industry, that may not take a lot of extra time once you settle into a new job, but it could take a few years to learn new knowledge and skills needed to make the transition. No two people will take the same path toward increasing their income, but doing so is one of the most powerful ways to build wealth.
By now, you should have some money left over at the end of every month. But because your goal is wealth building, you want to save and invest that money instead of spending it. That doesn’t mean you can’t splurge every now and then, but saving and investing should be the primary goal here. There are many different strategies when it comes to saving and investing, but firstly, you should be sure you have a large enough emergency fund to cover a job loss or big expense. Six months is the common recommendation.
After that, you should contribute to your employer’s retirement plan, at least up to the amount of the match. The next step is to open an IRA. The Roth IRA has great tax advantages because you don’t have to pay taxes on growth. That makes them ideal for those who are young and just getting started.
If you don’t like your employer’s investment options, or they have high fees, you can work on maxing your IRA or Roth IRA next. Ultimately, you should keep contributing to both of these plans until you maximize your contributions because they both have tax advantages. If you are able to maximize your contributions to both, you can then consider contributing to a taxable brokerage account.
Last, but certainly not least, is to stick to the plan for the long haul. As mentioned in the introduction, successfully building wealth takes time, to the order of many years. One way to make that happen is by automating everything. You can make contributions to your retirement plan at work automatically via payroll deduction. In addition, you can automate contributions to an IRA and brokerage account.
Remember that the goal is not to save every last penny. Your budget determines how much you will save for retirement – if you have money left over, that money is yours to spend however you choose. The important thing is to set realistic, achievable savings goals that you can repeat month after month, year after year.
Building wealth can seem impossible, especially if you are just getting started. Still, saving and investing money every month, however small the amounts, will put you on the right path. You can always increase your contributions later, either by reducing expenses, increasing income or both. Remember that with investing, the longer your time horizon, the more room your money has to grow. Automate your plan and stick to it over the course of your career, and you will be able to build significant wealth over the years.
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